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Blame for US mortgage debacle

  • December 13th, 2008

In  January  I mentioned the law that pushed US banks into lending to uncreditworthy borrowers.

Since then received wisdom in US liberal circles has held it that free market greed is the culprit for their woes.

So an Op Ed piece in the New York Times on 11 December, by a Manhattan Institute researcher (Howard Husock) is a welcome sign of balance intruding.

"There’s little doubt that the rating agencies helped inflate the housing bubble. But when we round up all the culprits, we shouldn’t ignore the regulators and affordable-housing advocates who pushed lenders to make loans in low-income neighborhoods for reasons other than the only one that makes sense: likely repayment."

The details are compelling:

"…under the past two administrations the Department of Housing and Urban Development pushed the secondary mortgage market to buy loans based on criteria other than the creditworthiness of borrowers. These affordable-housing goals became more demanding over time. By 2005, HUD required that 45 percent of all the loans bought by Fannie Mae and Freddie Mac be loans to borrowers with low and moderate incomes. HUD required further that Fannie and Freddie buy 32 percent of the loans in their portfolios from people in central cities and other underserved areas and that 22 percent of the loans they buy be to “very low income families or families living in low-income neighborhoods.”

And the conclusion:

"One cannot say with any certainty whether the more important cause of the current housing crisis was affordable-housing mandates or the actions of investment banks and ratings agencies. There can be no doubt, however, that both contributed"


  • Mark Wright
  • December 13th, 2008
  • 8:48 am

Hi Stephen,
No, we shouldn’t ignore the effect of government regulation, or lack thereof in the debacle. But it would be a mistake to apportion blame in any way equally to both the Community Reinvestment Act and failure of proper regulation of the finance industry.

If the CRA and requirements of the HD was such a major contributor, why did the problems extend so far beyond their reach? It didn’t oblige anyone to actually purchase the Mortgage Backed Securities or Collaterlised Debt Obligations issued by Fannie Mae and Freddie Mac. Yet Bear-Sterns, Lehman Brother et all went crazy. Indeed there’s evidence that these firms wanted to buy *much more* MBS and CDO than was actually on offer and that some firms were offering such paper not *not* backed through to real loans. At the heart of this was their ability to generate paper profits (on the basis of which their executives were rewarded) based on the grossly overstated valuations of these securities’ values.

Why did the British and European banks get so badly hit? Where was their government intervention forcing them to lend so badly?

  • Deborah
  • December 20th, 2008
  • 3:51 pm

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